Investment consultants plan to fight UK competition probe

The world’s biggest investment consultants plan to fight on against a full-blown competition probe in the UK. Aon Hewitt, Willis Towers Watson and Mercer had all recommended competition rules to the country’s financial watchdog, which were deemed too little too late. The Financial Conduct Authority will now consider if their study into the conflicting interests in the sector are grounds enough to refer it to the anti-trust authority.

The final report from the Financial Conduct Authority’s ‘Asset Management Market Study’ has recommended that the Treasury considers bringing investment consultancy services under its watch. The industry does not currently fall under their jurisdiction, with the asset allocation advice provided by investment consultants and employee benefit consultants considered to be self-regulating. However, the FCA had been conducting a study since November, amid growing clamour for investment consultants to be forced to spin off their fiduciary management businesses in order to avoid conflicts of interest. The news comes as the consulting industry as a whole continues to come under increasing scrutiny, with a study by the EU Parliament on global tax avoidance, prompted by the Panama papers scandal in 2016, also calling for new measures to hold the world’s largest four auditing practices of Deloitte, EY, KPMG and PwC to account.

The largest investment consultancies in the investment consulting market meanwhile – known in the segment as the Big Three – Aon Hewitt, Willis Towers Watson and Mercer collectively control up to 71% of investment consultancy revenues in the UK. Other large players include UK players such as Barnett Waddingham, Hymans Robertson and Reddington.

The firms had previously attempted to avoid a full-on competition probe by recommending a set of their own proposals to the FCA at the mid-point of the study. The firms claimed the proposed measured were aimed at improving competition and transparency in investment consultancy and fiduciary management, however they also refused to provide public details of the proposals to other companies, a move that was said to have irked smaller rivals, who accused the three firms of behaving as ‘poachers turned gamekeepers.’

Commenting on the proposals, John Walbaum, head of investment consulting at the UK’s fourth-largest consultancy in terms of revenues, Hymans Robertson, said a lot of the undertakings from the Big Three are “not daft”. “But it doesn’t feel right that they are dictating rules that could affect the entire industry.”

Conflicting interests

In the final report, the FCA concluded it was still concerned with regards to conflicting interests within the sector – with a specific focus on conflicts that arise from investment consultancies offering both advice and fiduciary management. The authors stated, “We have not received any evidence which has changed our view that the competitive process in the market for fiduciary management could be improved.”

Vertical integration between advisory and fiduciary services was also identified by business respondents of the FCA’s report as the most serious potential conflict of interest. Among other causes for concern for those surveyed were the remuneration model and the offering overly complex services to justify advice which could lead clients to feel short-changes, firms’ training seminar offerings which seemed geared to sell more services rather than educate trustees, and the impact of ‘gift giving’ as a method of illegitimate control. The regulator meanwhile found that the Big Three investment consultants earned at least 56% of the revenues in the advisory market combined, underlining their dominance.

The FCA had said it would provisionally reject proposals put forward until the publishing of its findings, and will spend the coming period consulting the wider industry on the trio’s suggested reforms, before making a final decision as to whether to refer the sector to the anti-trust of the Competition & Markets Authority (CMA) for further investigation in September. The recommendations, which are now public, include proposals for mandatory tenders and greater information on manager performance, however they are expected to evolve if the probe is expected to be halted in the Autumn, with the previous offering having not been enough to stop the process going further.

Big Three block

The Big Three are subsequently forecast to step up their attempts to avoid a referral to the anti-trust authority, as the resultant 18-month competition probe process would be expensive and time consuming for them, on top of fears that amplified scrutiny in the UK could prompt other regulators around the world to take a closer look at the sector. While the companies are far from household names beyond the investment industry, consultants continue to advise pension funds, insurers and charities decide on how to invest trillions of dollars of cash globally.

Despite their global reach and substantial market influence however, the FCA said in its landmark study on the asset management industry, that it was difficult for investors to assess the quality of advice provided by consultants – and with the importance of the money, particularly pension funds, currently being gambled on the strategic input of these firms, such quality control is important to ensure no return to the international banking crisis of 2008. With an ageing population in many of the world’s richest nations now, a continued lack of regulation could lead to a crippling pension deficit. Pension assets have since increased by about $14 trillion relative with the increase in global GDP, leading to some suggestions that it could be the next major bubble to burst.

Responding to the report’s FCA regulation recommendation, Aon Hewitt, said in spite of the attempts by the Big Three to avoid a probe, it was business as usual. Speaking on behalf of the company, Andy Cox, the firm’s EMEA CEO, commented, “We chose to be regulated by the FCA in 2011 and we extend the principles of this regulation across our whole UK investment practice. This will promote consistently high standards across the industry, although it represents little change for us.”

Meanwhile Mercer, which is the largest investment consultancy globally, boasts worldwide assets of $9 trillion under its advice, said the company would work with the FCA to resolve its concerns. However, Andrew Kirton, Chief Investment Officer at the company, commented that Mercer remained keen to avoid a competition probe, which would create ‘uncertainty’ for clients. “We are hoping that the other investment consultants and fiduciary managers and broader industry read the undertaking and think about the significance and what it means for them. If logic were to prevail, I think there is a good chance the undertakings would be accepted,” he said.